Insight into marketplace began during experience in Lawrence

Vernon Smith, who won the Nobel Prize for economics Wednesday, says one of his first lessons in supply and demand was in Lawrence.

Smith, a Kansas University student and teaching assistant from 1949 to 1952, and his friends sold their classmates beer they brewed in a co-op house on Ohio Street.

"You can't believe the good beer we brewed there," he said during a telephone interview Wednesday. "We had a 20-gallon crock, and we made it once a week. We supplied all the student houses."

Smith, now a 75-year-old professor at George Mason University in Fairfax, Va., laid the foundation for the field of experimental economics. He is thought to be the first KU graduate to receive a Nobel Prize.

Smith will share the $1 million award with Daniel Kahneman, 68, a researcher at Princeton University in New Jersey who integrated the fields of psychology and economics to help understand buying habits. It was the third year in a row Americans have won the prize.

Smith, who received a master's degree in economics from KU in 1952, published theories beginning in the 1950s that led economists to treat their field more like a science.

"Economists had always relied on data from the real world to test their hypotheses, theories and ideas, unlike psychologists, who run controlled experiments all the time," said Keith Chauvin, associate dean of KU's School of Business.

Wichita native

Smith's research has included hiring students to participate in mock auctions with different sets of rules. His findings have shown that markets don't necessarily have to have a large number of buyers and sellers to operate efficiently.

He also has worked on "wind-tunnel tests" that could determine in advance, for example, whether deregulating electric companies or privatizing public monopolies would be effective. That research led to work with the governments of Australia and New Zealand on privatization issues and with the California state government on water market issues.

Mohamed El-Hodiri, a KU economics professor, said many of the theories and methods developed by Smith are used in college classrooms around the nation.

"The economists have been reluctant to do anything experimental," he said. "The classic scientific idea is if you can't control, you don't have an experiment, and in an economy you can't control it. So instead of experimenting with the whole world, he said you can pick a small part and control what you can."

Born in Wichita, Smith received a degree in electrical engineering from California Institute of Technology in 1949, then came to KU to study economics.

He calls his time in Lawrence "three glorious years." He credited Richard Howe, then a KU economics professor and noted economist, for forming the basis of his career.

Visits to KU

"It convinced me I should stay in economics after getting a degree in electrical engineering from Cal Tech," Smith said. "Under Richard Howe, I learned what scholarship was really about, which is persistence. He was inspiring."

Smith later received a doctorate from Harvard University in 1955. He's taught at Purdue University, Brown University, University of Massachusetts, University of Southern California, California Institute of Technology and the University of Arizona.

The Wichita-based Koch Foundation donated $3 million to help convince Smith and his team of researchers to move from the University of Arizona to George Mason University in 2001. Charles Koch, CEO of Koch Industries, serves as a board member at George Mason's Mercatus Center, a multidisciplinary research group.

Smith returned to KU three times between 1997 and 1999 to speak at seminars and help establish computer models for business and economics research.

He said he was relieved when the Royal Swedish Academy of Sciences called him Wednesday morning to tell him about the Nobel prize.

"My friends have felt I'm long overdue on these things," he said. "It was good to know they were right. I haven't been that concerned about it. I would have done those things if the Stockholm academy hadn't existed."